Bank Competition and Industrial Structure: Evidence from China

Abstract

We examine the impact of bank competition on the industrial structure using a city-industry level dataset during 2005-2009 in China. We find that bank competition increases the number of firms per capita and decreases average firm size in industries with higher external financial dependence. Bank competition affects industrial structure through increasing the proportion of SMEs. The impact of bank competition is more pronounced for private firms, and joint stock banks are the most efficient players in enhancing industrial structure. We instrument bank competition with average bank competition of other cities in the same province, and also employ the deregulation of bank branching in 2007 as a natural experiment, which confirm the robustness of our findings. Bank competition thus enhances the competition in the product market.

Keywords: Bank competition, Industrial structure, External financial dependence, Deregulation

JEL Classification: G21, G28, L11